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Small Business Owner? Here’s What You Need to Know Before You File.

by UFile Team Équipe ImpôtExpert | May 22, 2018   Comments:

UFile-blog-Small-Business OwnerThe end of personal tax season heralds the beginning of business tax season.

Before the beginning of this year’s business tax season, many owners and shareholders may have remarked upon recent rule changes, made by the federal government, which will affect the way they and their business file their taxes. As the June 15 filing deadline approaches, they may be wondering what exactly these changes mean for their 2017 return.

For those who have small business tax on the brain, don’t fret – we break down the changes, the effects, and the key things to know.

How often do small business tax regulations change?

The short answer? Not very often. Because tax regulations are so closely related to accounting principles when it comes to businesses, major changes are rare. When changes do occur, they are typically communicated through the annual budget announcement, and later on the CRA website. Before you load up your CRA tax return software, it’s a good idea to read through the CRA website for any important notices.

What are some of the changes I should know about for the 2017 tax year?

The changes announced by the Finance Department last July and revised last December affect shareholders of small private corporations. If that applies to you, you’ll want to note two important changes before you file using CRA recommended software.

Change #1: Comprehensive changes of the Tax on Split Income (TOSI) rules

TOSI rules are sometimes referred to as a “kiddie tax”. Many business owners will make their children shareholders of the family company even if they don’t work or contribute to the business in order to spread the income generated by the business to lower-taxed family members. In years prior to 2018, if the child was younger than 18 and this type of income sprinkling occurred, the dividends received by the minor child would be taxed at the highest tax bracket (33%), regardless of what the income was.

Starting with 2018, the government has expanded the family members to include adult family members, as well as the types of income (capital gains, rental income and income allocated from a trust) subject to this tax. It is also important to note that adult family members must now be contributors to the business in order to be exempt from this tax. The same tax at the highest tax bracket is applied to the dividends or capital gains generated by the family business and passed along to the family members. With this change, the government is trying to limit “income sprinkling” between family members who are shareholders of a family business using TOSI.

Change #2: Taxation of passive (investment) income left over in corporations

This second change is all about the government trying to limit the use of corporations as a tool to defer taxation on passive (investment) income in the hands of the individual shareholder. After 2018, the active income that can benefit from the preferential tax rate enjoyed by small private corporations (10% for 2018) will be decreased gradually if they receive passive (investment) income between $50,000 and $150,000, and eliminated beyond that upper limit.

I want to read more about the changeswhere can I find additional resources?

Your best bet? The CRA website. Any changes made to the tax return, whether business or personal, can always be found there. We always recommend checking out the latest news and updates before you start filing your taxes using CRA income tax software.

Have more questions about small business taxes? Connect with us on Facebook and Twitter for news and updates on the 2017 tax return and UFile 2017 CRA approved tax software. Visit Tax & U for accurate answers to all your questions about your 2017 tax return.

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